Upload
others
View
1
Download
0
Embed Size (px)
Citation preview
GAO United States General Accounting Office
Testimony
For Release on Delivery Expected at 1O:OO a.m. EDT Wednesday April 18, 1990
Savings Opportunity for the United States Mint's Promotional Mailings
Statement of L. Nye Stevens, Director Government Business Operations Issues General Government Division
Before the Subcommittee on Consumer Affairs and Coinage Committee on Banking, Finance, and Urban Affairs House of Representatives
@j-9(0; 1. IYIIL { GAO/T-GGD-90-34
I GAO Form 160 (12/87)
SAVINGS OPPORTUNITY FOR THE UNITED STATES MINT'S PROMOTIONAL MAILINGS
SUMMARY OF STATEMENT BY L. NYE STEVENS
DIRECTOR, GOVERNMENT BUSINESS OPERATIONS ISSUES
GENERAL GOVERNMENT DIVISION U.S. GENERAL ACCOUNTING OFFICE
The Mint's numismatic programs are operated essentially as a direct mail business, through promotional mailings to a list of, currently, 2.8 million collectors. Gross sales attributable to the Mint's direct marketing programs peaked at $390.5 million in program year 1987 and fell off to $178.6 million in 1989. Profits from the Mint's operations are turned over to the Treasury, so that increased profits from reducing Mint's business costs could help reduce the federal deficit.
Like other federal agencies, the Mint is required by law to use cost-effective mailing practices. The Mint has taken several actions to reduce its postage costs. For example, the Mint has begun using software to control the size and quality of its mailing lists and to obtain presorting discounts for its promotional mailings. However, the Mint could reduce by more than half the $4 million basic cost of its mass promotional mailings if it paid third-class instead of first-class postage rates. The higher weight threshold of 3.3 ounces for third class before an incremental charge is incurred would also increase advertising flexibility.
Mint management presented an array of concerns about third class. Because of the value of the rapidly expanding direct marketing business, which makes heavy use of third class, USPS has worked closely with businesses to study concerns about the delivery, timeliness, and image of third class. The result is a large body of evidence that counters the Mint's concerns. Based on these study results and the opinions of industry experts, GAO believes that third class, with an instruction on the envelope that it be forwarded, is appropriate for the Mint's promotional mailings. The Mint could save $2.4 million annually by using third class for its regular promotional mailings. These savings would be further increased (1) when third class is used for special promotions using supplementary mailing lists, (2) if the Mint combined mailings now restricted by the additional charges incurred above the 1 ounce first-class weight limit, and (3) if first-class rates rise more than third-class rates in 1991 as proposed by the Postal Service.
GAO recommends that the Mint budget for and use third class for its promotional mailings.
Mr. Chairman and Members of the Subcommittee:
We are pleased to be here today to discuss the results of our
review, requested by this Subcommittee, of opportunities to
reduce postage costs at the United States Mint. This work fits
into our overall program of reviewing mail management in a number
of government agencies. We were able to apply lessons learned at
other agencies to the Mint.
The Mint has taken several pos itive steps to reduce its mailing
costs. However, all Mint promotional mailings are sent first
class. We believe the Mint could reduce its basic, recurring
postage cost of about $4 million by $2.4 million annually, as
well as gain considerable marketing flexibility, by using third
class (bulk business rate) as the commercial sector does.
My comments today are based on work that we did primarily in
January and February 1990. Our review focused exclusively on the
Mint's numismatic promotional mailing practices. We reviewed
documentation of the Mint numismatic mail operations to
reconstruct dollar costs and mail volumes for fiscal years 1985
through the present, and Mint projections of postage costs for
fiscal years 1990 and 1991. We obtained several studies and
opinions on third-class mail deliverability and timeliness and
the Mint's promotional mailings through interviews with a number
of Mint, industry, and United States Postal Service (USPS)
1
officials.
The industry leaders we obtained information from were key
members of the Mailers' Technical Advisory Committee, which is a
primary avenue for the exchange of views between USPS and volume
mailers. From this organization we spoke with the Vice President
for Government Relations of the Direct Marketing Association, the
Executive Director of the National Association of Presort
Mailers, the Executive Director of the Third Class Mail
Association, and the Industry Chairman of the First Class
Standing Subcommittee, who is also a representative from the
Federal Government Association.
BACKGROUND
The Mint's numismatic programs are operated essentially as a
business. Through these programs, the Mint produces coins and
medals for sale, advertises these products widely, generates
revenues from their sale, and deposits profits from these sales
into the general fund of the Treasury.
The Mint sells its products through advertising targeted at
special audiences. According to Mint officials, gross sales
attributable to direct marketing programs peaked at $390.5
million in program year 1987, and fell off to $178.6 million in
1989. Figure 1 illustrates the Mint's gross sales attributable
2
to direct marketing for program years 1986 through 1989.
Figure 1: Direct Marketing Gross Sales Have Declined
so0
-I
200
100
0 l--l
A-L A.
Program Propm Ragnm Pmgnm Yrr Y9W Ymr Y9U 1986 lW7 loo8 low
Dlnd Matilng 01or Sales
source: U.S. Mint data
Over the last few years the Mint has typically sent a promotional
mailing for each product marketed during the year. Separate
mailings have been done for the Mint's uncirculated, proof,
bullion proof, and commemorative coins, along with a catalog for
holiday sales. These promotional mass mailings have been sent
first class. Program year 1989 Mint data show that responses in
3
the form of orders ranged from about 7.6 percent for the holiday
catalog to 32.7 percent for the proof coin promotion. The
average response rate was 17 percent for five major mass mailings
done for 1989 programs.
The Mint's mailing list currently contains 2.8 million
recipients. The mailing list has been built from prior
customers and people who have requested that they be put on the
list. For some mailings, the Mint's list has been supplemented
with additional mailing lists targeted at audiences expected to
be interested in the theme of particular promotions. For
example, in fiscal year 1988 the Mint used mailing lists supplied
by the Olympic Committee to send supplementary mailings to over
10 million recipients for the Olympic commemorative. For the
current commemorative program-- the Eisenhower commemorative--the
Mint plans to send promotional mailings using lists of military
officers and retired military personnel.
Postage for the numismatic program promotions was $6.7 million
for fiscal year 1988-- the year for which we did our most
extensive analysis. The Mint's postage for promotion costs, as
submitted in its end-of-year estimate to USPS for fiscal year
1989, was about $5.3 million. Mint officials project promotional
mailing costs for fiscal year 1990 will amount to $6.7 million.
The cost of the Mint's promotional mailings, based on its postage
payments to USPS, is illustrated in figure 2.
4
Figure 2: Numismatic Promotional Mailing Costs
Fhal - t-z F!z 72 YOU Ymr 1902 lem lea7 lee0 lee2
Promdw Ndling camt*
Fkcal Year 1989 page costs have not been audited of apprwed by USPS.
THE MINT USES SOME MAILING PRACTICES
THAT REDUCE ITS POSTAGE COSTS
Federal regulations1 and good management practices require each
federal agency to have a mail management program whose objective
1See Federal Information Resources Management Regulation, 41 C.F.R. Section 201-45.107-2 (1988).
5
is to provide rapid handling and accurate delivery of mail at
minimum cost. The Mint has made improvements to its mail
operations that have allowed it to reduce its postage costs
significantly. In 1988, the Mint installed computer software to
standardize addresses according to USPS criteria and has used
other software to add the g-digit ZIP code to its mailing lists.
The Mint obtains presort discounts from USPS by sorting to
various levels. According to agency officials, the Mint's
mailing list can typically achieve the following presort levels:
--70 percent of mailings are sorted to the USPS carrier
route level.
--20 percent of mailings are sorted to the 5-digit ZIP
code level.
Agency officials say that the remaining 10 percent of mailings
cannot be sorted to the 5-digit ZIP code or carrier route
levels. These are known as residual pieces, which are charged
the first-class single piece rate.
These presort levels are important because USPS offers
substantial discounts for presorting mail. Obtaining a 5-digit
presort discount reduces first-class postage charges for the
first ounce by 4 cents (16 percent). Obtaining the carrier route
discount reduces first-class postage charges for the first ounce
by 5-l/2 cents (22 percent).
These cost reduction percentages, weighted by the percentage of
6
presort levels that the Mint mailings attain, show that the Mint
is paying 18 percent less for first-class postage than it would
if it were not using available software and not presorting its
mail.
THIRD CLASS SHOULD BE USED
FOR PROMOTIONAL MAILINGS
The Mint could further reduce its postage costs by using third
class for its promotional mailings. Doing so would increase
profitability, increase contributions to the Treasury, and,
ultimately, help reduce the federal deficit.
Substantial Costs Could Be Avoided
By Using Third Class
The basic rate for first-class mail is 25 cents, while the basic
rate for third class is 16.7 cents --8.3 cents (33 percent) less
than first class. The rate for first-class mail presorted to 5
digit levels is 21 cents, while the 5-digit rate for third class
is 13.2 cents --7.8 cents (37 percent) less than presorted first
class. The rate for first-class mail sorted to the carrier route
level is 19.5 cents, while the carrier route rate for third class
is 10.1 cents--g.4 cents (48 percent) less than similarly sorted
first class.
The differences are quite significant when these figures are
applied to the Mint's basic 2.8 million recipient mailing list.
As in fiscal year 1989, the Mint typically has five major
promotional mailings, and two mailings weigh over 1 ounce per
item. Using these mailings and the Mint's current mix of 70
percent carrier route, 20 percent S-digit, and 10 percent that
cannot be sorted to these levels, we estimate that the Mint can
expect a recurring postage cost at first-class rates of about $4
million for its basic mailing list alone. Using third-class
rates for computing the Mint's postage costs in the same manner,
we estimate that the Mint's promotional mailings would cost $1.6
million, reducing its postage costs by about $2.4 million (about
60 percent) for its regular mailing list. Additional savings
would be achieved by using third class for the Mint's
supplementary mailing lists. I note that Mint plans to spend
about $6.7 million on five major promotional mailings in fiscal
year 1990-- a 68 percent higher spending level than we used in
developing our estimate.
We analyzed fiscal year 1988 Mint mailing costs in detail because
they were the most recent that USPS had verified and approved at
the time of our review. In 1988 the Mint mailed promotions that
were mostly attributable to four programs and its holiday
catalog. Four major mailings exceeded 1 ounce (two mailings were
for the bullion program) and incurred a surcharge of 20 cents per
piece. As noted earlier, for the Olympic commemorative the
8
regular mailing list was supplemented by other mailing lists so
that there were over 10 million mailings for this program in
fiscal year 1988. Total costs for the promotional mailings in
fiscal year 1988 amounted to $6.7 million. Based on our
analysis, using the Mint's percentage of presort rates it
typically obtains, we found that the Mint could have mailed the
promotions for $2.3 million at third-class rates, reducing its
postage cost by $4.4 million--about 66 percent.
It is also important to be aware of postage rate increases that
will come into existence in the near future. USPS has submitted
a proposed rate increase for 1991 that would result in a greater
increase per piece for first-class mail than third class. First-
class mail at the proposed rates would increase 5 cents per
piece for the first ounce for the Mint's mailings, while third
class rates at the same sort levels would increase by only 2.2
cents per piece. The difference in the increases alone, at a
conservative 5 mass mailings a year, amounts to almost $400,000 a
year. USPS has also proposed increasing charges for additional
ounces at first class by 3 cents. At that rate, if two Mint mass
mailings a year exceed one ounce, as they have in the past, the
Mint will incur an additional postage cost of about $160,000.
In addition to achieving the cost reductions from using third
class, third class offers greater flexibility. The basic weight
unit for third class is 3.3 ounces per piece, compared to 1 ounce
9
for first class, before a mail piece incurs a surcharge for
additional weight. The higher weight ceiling for third class
would allow advertising more than one product in each promotional
mailing without incurring additional postage costs. The Mint
currently attempts to do such promoting on a limited basis,
working within l- and 2-ounce first-class weights and by
including its advertising with other agencies' mass mailings
(such as IRS' income tax refunds). One Mint official agreed that
being able to include up to 3.3 ounces of material in each
mailing without incurring additional cost could generate a "cross
shopping effect" that might stimulate revenues from many of its
mailings.
Since the Mint uses the same basic mailing list to send its
promotional mailings, the Mint could also merge some mailings
before encountering a surcharge for exceeding the basic third-
class weight. Merged mailings would eliminate the postage costs
of some promotional mailings entirely. Potential merged mailings
include the uncirculated and proof mailings, which are now mailed
separately early in the year, and the catalog and proof bullion
mailings, which are now mailed separately in the fall.
10
MINT CONCERNS ABOUT USING
THIRD CLASS
During this review Mint officials expressed several concerns
about changing to third class for promotional mailings. While
granting a postage cost advantage from moving to third class,
Mint officials are concerned that the overall revenue impact
might be negative. We have given the Mint's concerns the careful
attention that they deserve, and we believe that each can be
allayed.
Concerns About Nondelivery
In discussions during this review, Mint officials expressed
concern about nondeliverability of mail sent at third class and
cited a concern about revenue loss from nondelivery of mail.
Mint officials believe nondelivery of third-class mail is about
14 percent and, applying that figure as lost sales, generated
projections that indicate that they would lose more revenues if
third class were used than they would save in reduced postage
costs.
Nondelivery of third-class mail has been a longstanding concern
of organizations in the direct marketing industry. While there
have been several studies of this issue, we believe a study
conducted by USPS in 1988 most closely matches the Mint's
11
mailings. This study was reviewed and endorsed by an
independent consultant hired by five major mailing associations--
the Direct Marketing Association, the Mail Order Association of
America, the Third Class Mail Association, the Mail Advertising
Service Association International, and the Alliance of Nonprofit
Mailers. After reviewing the study, design, methodology, and
implementation on behalf of the mailing associations, the
consultant endorsed the study as a reliable approach that the
mailing associations and USPS could accept as a valid indication
of the amount of nondelivery of mail.
For one test conducted by USPS in August 1988, the test piece
was a properly addressed flat--that is, an envelope larger than
typical folded business letter size --that weighed over 6 ounces
and had no instructions on the envelope that it be forwarded if
the addressee had moved. Only about 30 percent of the mailing
was sorted to the carrier route level. (According to an industry
expert, the higher the proportion sorted to carrier route, the
lower the amount of handling by USPS and the lower the error rate
in delivery.) Nondelivery for this mailing was estimated to be
2.6 percent. USPS and major industry representatives have
accepted 2.6 percent as an accurate nondelivery percentage for a
properly addressed flat of this type.
One industry expert said that this 2.6 percent nondelivery rate
for the third-class test is not substantially higher than the
12
nondelivery that occurs due to errors for any mass mailings, no
matter what class of mail is used. This is because all classes
of mass mailings are affected by inadequate preparation of mass
mailings (primarily poor addressing), handling errors by USPS
during transit of products, carrier error (mail pieces delivered
to the incorrect destination), and households accepting mailings
addressed to other parties.
We had discussions specifically about the M int's ma lings with
the Executive Director of the Third Class Mail Association and
the Chairman of the First Class Mail Subcommittee of the Mailers'
Technical Advisory Committee, who is also a Federal Government
Association representative on the Committee. According to these
experts, a letter-sized mail piece with address preparation of
the quality of the Mint's mailings and a forwarding endorsement
should achieve greater deliverability than the test results. The
Mint's mail pieces are lightweight, sent in regular-sized
envelopes, and can be handled by USPS more efficiently than a
flat. The Executive Director of the Third Class Mail
Association said that problems with third-class mailings are
primarily associated with improperly prepared addresses. As
mentioned earlier, we believe the Mint uses excellent mail
preparation. Also, the Senior Vice President for Government
the Relations for the Direct Marketing Association said that
level of carrier route presort, the lower the
ing error by USPS. The USPS study tested a ma
13
higher the
of a hand1
chance
iling
which had a 32-percent carrier route presort level, while the
Mint's mass mailings have a 70-percent carrier route rate.
Mint officials also expressed a concern that third-class mail,
when forwarded, would incur a forwarding charge. Mint officials
have said that usually 300,000 to 350,000 of their mailing list
addresses change during a year. While third-class mail without a
forwarding endorsement does not have to be forwarded, mailers can
get the same forwarding service for third class as first class by
requesting forwarding. This service is available without charge
if the addressee recipient has left a change of address notice
with USPS. A change of address notice is used by USPS to forward
mail for 12 months after the recipient relocates.
If USPS cannot forward a mail piece, undeliverable first-class
mail is returned to the sender at no charge, while USPS does
charge a fee for returning undeliverable third-class mail. The
fee is the appropriate single-piece third-class rate multiplied
by a factor of 2.733. However, a Mint official said that the
major portion of address changes come from customers whose mail
has been forwarded by USPS. While there would be an additional
cost of returning undeliverable third-class mail, it need be
incurred only once for each recipient since, according to a Mint
official, returned undeliverable mail forms the basis for
eliminating a recipient from the Mint's mailing list.
14
Concerns About Recipient Reaction
To Receiving Third-Class Mail
As they did in response to our 1975 report on mailing practices
at the Mint and other agencies,2 Mint officials again expressed
concern about the "image" of third class. There is evidence that
this would not be a significant factor in the circumstances of
the Mint's mailings. USPS' Household Diary Study,3 a major study
of classes of mail, says that the determining factor of recipient
responsiveness to a mail piece was whether the recipient had been
a prior customer. The Mint's mailing list, by definition,
consists of prior customers or those with a demonstrated
interest --the list consists of people who have been Mint
numismatic customers or who have asked to be added to the mailing
list.
As shown by the illustration of a typical Mint envelope in
appendix I, and the third-class alternative to it, the postage
class is hardly noticeable. We believe there is little chance a
customer would even notice that the Mint had used third class
rather than a presorted first-class imprint, and even less that
it would affect his or her decision to place an order.
2Federal Agencies Could Do More To Economize on Mailing Costs (GGD-75-99, Aug. 25, 1975).
3Household Diary Study--Fiscal Year 1987, Demand Research Division, Office of Rates, Rates and Classification Department, USPS. (Washington, D.C.: July 1988).
15
Concerns About Timeliness Of
Third-Class Delivery
During this review Mint officials echoed concerns expressed in
1975 about timeliness of third-class mail, particularly for
mailings that had a required response date. We found that most
of the Mint's mailings do not have a required response date and,
where there is a response date, there is a lead time of at least
a month, which could be met by third class.
USPS delivery standards for first-class and third-class mail are
admittedly different. USPS has set a l- to 3-day standard for
first-class mail. According to a USPS official, third-class mail
is to be delivered within a period of days equivalent to the
number of zones the mail must cross plus 2 days. (There are
eight zones spanning the country.) Thus, USPS delivery standards
for third-class mail range from 3 to 10 days.
A series of 11 USPS tests done between November 1986 and May
1989 found that delivery times for third-class mail usually came
within a fraction of a day of the USPS standards and that
presorted carrier route third-class mailings usually came under
the standards by a fraction of a day. As I mentioned earlier, 70
percent of the Mint's mailing list is presorted to carrier route.
16
Mint officials also said that its numismatic customers all want
to receive their promotional mailings about new issuances at the
same time and that the Mint will be subject to increased
criticism about varying arrival dates if third class is used for
mailings. However, the Mint's mailings are now typically mailed
over a 2-week period, so that we would expect little difference
in customer satisfaction between the current system and third
class.
To the extent that simultaneous delivery is a real concern, the
Mint could plan to enter its promotional mailings into the mail
stream at an earlier date and sequence them to meet the zone
delivery times, to allow for the longer anticipated time third
class spends in the mail stream.
Our discussions with associations of large volume mailers, and
our analyses of major studies pertinent to the issues raised by
the Mint, have convinced us that the Mint's continued adherence
to first class for its mass mailings is an outdated and wasteful
practice that has long been abandoned by the commercial sector.
The mail manager for the Franklin Mint--which also produces
collectors' items and sells them through mail order--said that
practically all promotional mailings by his company are sent
third class. Industry association representatives for third-
17
class and first-class mailers said that third class is
appropriate for the Mint's promotional mailings, as long as USPS
is instructed to forward the mailpiece.
RECOMMENDATION
We recommend that the Mint budget for and use third class for its
promotional mailings.
Mr. Chairman, that concludes my prepared remarks. My colleagues
and I would be pleased to respond to questions.
18
L
ATTACHMENT I ATTACHMENT I
COMPARISON OF PRESENT TO ALTERNATIVE IMPRINT __.. - . . ---.. -- -..- ~~~ UNITED S’CQTES MINT
Philadelphia. PA 19101-3636
OFFICIALBUSINESS PENALnFORPRlvATEUSE.1800
Remember the Man... Remember the Times
Remember it all wth the official 1990 Ewnhower Centemal Corn SPECIAL PPELSSUE DLSCOL’M
IWR EUtLY ORDERS.
UNITED SWTES Mm
OFFICIALBUSINESS PENALTYFORPRlVATEUSE,1300
Remember it all wth the ofliual 1990 Eisenhower Centennial Corn SPECIAL PBEJSSUE DISC0Uh-I
POE EARLY OitDELT.
CAR-RT PRESORT rrCR34 Brmdon S. Pottir 8257 Londonderry Cobrt Lmurol, MD 20707-5629
CAR-RT PRESORT MCR34 Scott Patti8 8247 Londonderry Court Laurel, MD 20707-5629
19